DISCHARGES OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. This exclusion applies to discharges made after 2006 and before 2013. If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income.
1. File Form 982 with your tax return. See the form's instructions for detailed information.
"A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. In most cases, this would occur in a refinancing or a restructuring of the mortgage.
Principal residence. Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.
Qualified principal residence indebtedness. This is a mortgage you took out to buy, build, or substantially improve your principal residence. It must be secured by your principal residence, and it cannot be more than the cost of your principal residence plus improvements.
Amount eligible for the exclusion. The exclusion applies only to debt discharged after 2006 and before 2013. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition
